Assessment 2: Project Report

BUSN 20019: Professional Project

New product Development opportunity and

challenges

Submitted by:
Alok Karki
S0279222

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Executive Summary
Increased competition in market because of globalization and cheaper labor have
created immense pressure on companies for innovation or new product development
(NPD). Organization are after applying strategies, building platform and techniques for
new product development. New product development helps companies to target new
market, lead market, increase revenue, increase share value and create brand image.
One of the challenge in NPD is cost management during product life cycle. Approaches
like Target costing and kaizen costing are used for cost reduction technique. These
approaches are verified using two different case study on automotive manufacturing
companies.

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Table of Contents
1. Introduction.......................................................................................................................................... 5
a. Background and problem definition ............................................................................................. 5
b. Aim and objectives ......................................................................................................................... 5
2. Literature review ................................................................................................................................. 6
a. Necessity of New Product Development (Innovation) .............................................................. 6
b. Cost Management in New product Development...................................................................... 7
i. Target costing Approach ........................................................................................................... 7
ii. Kaizen costing Approach .......................................................................................................... 7
3. Methodology ........................................................................................................................................ 8
4. Finding/Analysis ............................................................................................................................... 10
a. Product cost management (cost reduction) by kaizen costing system ................................ 10
b. Product cost management (cost reduction) by target costing system ................................. 11
5. Discussion ......................................................................................................................................... 13
6. Conclusion ......................................................................................................................................... 14
References ................................................................................................................................................ 15
Appendix .................................................................................................................................................... 17

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List of Figures

Figure 1: Mean and std. Deviation calculated based on five point Likert scale. ............ 10
Figure 2: Statistical calculation based on five point Likert scale. ................................... 11
Figure 3: Factor analysis ............................................................................................... 11

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 1. Introduction

Globalization has led to increased competition in terms of product and services, cost,
technologies and responses to costumers. Companies are under enormous pressure to
innovate and put forward new products in the market. Innovation or say new product
development (NPD) is a strategy of any organization to survive and lead current market.
My future profession will be project manager. It will be my responsibility to lead the
innovative project and successful completion.

a. Background and problem definition

New product development provides outline for creating products which helps organization
to improve their performance, quality and cost of the product. Globalization and cheaper
labor costs in some countries have created immense pressure and competition.
Organization to compete and ultimately thrive have to innovate.
Organization through innovation can target new markets, lead markets, improve the
market share value, increase revenue and can make brand image in costumer eyes
(Olson, 1995). One of the biggest challenge during new product development is cost
management which can determine the success and failure of product launch. Companies
spends lots of resources to minimize cost and best fit the quality (Sethi, 2000). Automotive
manufacturing companies are suitable company for our research in new product
development. Analysis based on the benefits and opportunities automotive manufacturing
company has achieved through innovation is done and how they overcome the problem
related to cost or say cost management is also analyzed.

b. Aim and objectives

Companies like Tesla motors, Apple and Samsung are leading the market despite of the
fierce competition in the market. They are successful in meeting the demand and
expectation of the consumers through innovation and new product launching. On the
other hand there are companies like KODAK, Blockbuster and Nokia who used to lead
the market once have failed. The failure was because of late innovation and cheaper
quality goods.
As the report title suggest two distinct characteristics opportunities and challenges of new
product development. First characteristic opportunities or benefits will be based on the
literature review of other published articles or views from expert. The second
characteristic challenges of new product development will be focused as our main
research topic. This is justified through the case study on manufacturing companies from
Malaysia, Nigeria and Netherlands.
Cost management is the main challenge faced by product development companies and
cost reduction is important issue. Cost management method like target costing, kaizen

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costing system for cost reduction of new product will be analyzed. More specifically this
study shall address the following objectives:
To determine whether implementation of Kaizen costing system will reduce the
cost of new product in all phases of the product development process in
manufacturing companies.
To determine whether implementation of Target costing will reduce the cost of new
product in all phases of product development process in manufacturing
companies.
Compare target costing performance of Malaysian and Dutch manufacturing
companies.

2. Literature review

New product development (NPD) also called new product management, is a sequence of
procedure that includes conceptualization, design, development and marketing products.
It is also a transformation of market opportunities into innovative product for sale. Product
development should be characterized by costumer requirements, competitive
atmosphere and nature of the market.
Every new product passes through several stages from innovation, design, planning,
manufacturing and market management. If the product are more complex requiring high
level of expertise then the NPD process passes through phases, milestones and
deliverables management. More complex the product then more complex NPD
management is required.

a. Necessity of New Product Development (Innovation)

New product development strategy is key for the company survival in global market. It is
also responsible for financial growth, improvement in technologies and better
employment. New product development helps to add new value for costumer and helps
to continue existence and growth of the company.
Wrong market target with wrong price of the product can be devastating for any
organization. Right timing is important for product launch, delayed launch can kill the
product (Ali, Krapfel & LaBahn, 1995). Once the leader of the mobile manufacturer, is
washed away from mobile market. Reason behind this catastrophe was Nokia delay on
launching new smart product development as compared to competitor.
Quality and short product development time with lower cost are becoming the key factor
for existence of any organization. Innovation is liable for enhanced employment,
economic growth, improvement in technologies and the living standards (Bhuiyan, 2011).

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 b. Cost Management in New product Development

In early stages of Product development, the estimation of product life cycle cost is the
principal information needed to determine the success of the product (Tu, Y. L., & Xie,
2003). Cost control and optimization is important for product success. Cost control is a
method which emphases on controlling the over-all cost through competitive analysis.
Companies are concerned with cost management techniques to generate revenue and
stay strong in fast shifting scene (Pazarceviren, Akcin & Ozsuer, 2015). Cost
management is key element for survival in highly competive environment and approach
to decrease the cost of product. Traditional method focuses on decreasing the cost of
current product whereas target costing focuses to reduce the cost of future or upcoming
products (Mijoc, Pekanov & Mijoc, 2014). Target costing concept was introduced as a
need for organization to improve product cost management of product development
(Kocakulah & Austill, 2011).

i. Target costing Approach

Target costing is a cost management method designed to (1) plan and design activities
of innovative product, (2) monitoring successive operational phases, and (3) make sure
profitability target during the product life cycle (Shank & Fisher, 1999). It is design-
centered and focuses on the market whereas traditional cost management techniques
trade off quality of the product to achieve target cost at last stage (Sani & Allahverdizadeh,
2012). Target costing is also a method of reducing the costs of future products I.e. new
products while it is still in new product development process (Bhuiyan, 2011).
The first step in the target costing method includes market research and based on the
market the target selling price is determined, second step is setting desired profit, third
stage include calculation of the allowable cost of the product and the final step includes
determination of volume of product and marketing cost which can assure not to exceed
the target costs (Hamood, Omar & Sulaiman 2016).
Based on descriptions of target costing, one could consider it as an approach to reduce
product costs which begins at product planning stage (Shank & Fisher, 1999). According
to Cooper and Yoshikawa (1994) target costing leads to new product with smaller cost
than design engineers working to minimize the future product cost. Through this
discussion, future product cost is expected to be minimized through target costing.

ii. Kaizen costing Approach

Another cost management technique used is kaizen costing. Kaizen is a Japanese term
with two Japanese words: KAI (change) and ZEN (for better) (Rof, 2012). This concept
refers to the process of continuous improvement. Kaizen costing system is based on the
small incremental modification to the product in the manufacturing stage of the product.
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As target costing focused on market (Okoye, Egbunike & Meduoye, 2013). Kaizen costing
is continuously looking for improvement through implementation of better way of doing
(Titu, Oprean & Grecu 2010). Kaizen costing makes sure that new product fulfills
customer demand based on quality, functionality and price (Modarress, Ansari &
Lockwood, 2005).
Kaizen costing concentrates on overall cost reduction throughout the manufacturing
process, with the effort from all departments and specially involvement from production
department (Talha & BRaja 2010). In order to justify the continuous cost reduction aim,
kaizen costing management should focus on listed aspects:
All the phases involved in the lifecycle of the product must be controlled
New product should be profitable during its entire life cycle
Deployment and motivation of all the competencies within an organization.
For successful Kaizen costing approach, perfection is not the key element, rather looking
for gradual improvement in the existing problem with acceptable cost (Barbosa, Afonso
& Nunes 2012). It should encourage collective decision making, ideas from all
departments and individual are welcomed. There is no boundaries to the level of
improvements.
Kaizen costing method achieves the cost reduction objective through control of each and
every phases of the product lifecycle. Ensuring that new product developed should be
profitable throughout their life cycle. Mobilizing and motivating competencies within
organization through a transversal approach, favoring competition.

3. Methodology

Qualitative secondary data are used for the research purpose. Reason behind use of
secondary qualitative data is its usefulness for generalization of our research topic and
for comparison of data sets. It has also helped to access the sensitive or unreachable
population. Rich data can be accessed easily from secondary researchers.
External source for our secondary qualitative data as a data sources like Books, journals,
internet and libraries. Data flow starts from data source followed by secondary data
source, external sources, published data and internet. Data collection were carried out
from the initial phase of the project and were added progressively as the report continued.
Data collection were done based on the key points of our research topic from the internet,
google scholar and CQU library
To determine the influence of target costing in the new product development success,
case study by Afonso, Nunes, Paisana & Braga (2008) was utilized where an electronic
questionnaire was designed. Survey method was used to permit statistical analysis.

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Before the implication of the survey structure of the questionnaire was designed web data
gathering system was introduced. 500 manufacturing company was informed about the
project and questionnaire was also sent. 82 responses were received which were
involved in new product development. Large number of variables was present so surveys
data was partly reduced through factor analysis. Factor analysis was used to compose
the expected latent variables New product success and Target costing. Statistics such
as correlation matrix, rotated component and regression method was used for calculation
of score of the factors.
Research done on target cost management for automotive company by Baharudin and
Jusoh (2015) on Joint Venture Company from Japan and Malaysia. It uses multi-source
of data collection obtained by various methods like interviews, direct observation and
documentation. Direct observation data from company presentations, meetings, field visit
and interview were carried for data collection purpose. For interview protocol was adapted
from Ellram (2000), data was gathered through in-depth interview with key personal of
the company. The findings were validated and reliability check was done by two
practitioner and academicians who had no involvement in the research. All the qualitative
dada were coded, analyzed and categorized which were later sent for pattern matching
through contrasting empirical based pattern and conceptual pattern.
On Kaizen costing system for product cost management by Okoye, Egbunike and
Meduoye (2013) uses descriptive survey method. Data collection was acquired from
questions structure based on five point Likert scale where SA: strongly agree, A: agree,
ID: indifferent, D: disagree and SD: strongly disagree. 60 accountants were used as
respondent and statistical method like frequency table, Kolmogorov-Smirnoff test and
multivariate analysis was used for analysis of data.

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 4. Finding/Analysis

a. Product cost management (cost reduction) by kaizen costing system

Figure 1: Mean and std. Deviation calculated based on five point Likert scale.

The figure above is the statistical analysis of the reponses by the respondant based on
the five point Likert scale. Minimum being 1 means strongly agree and maximum being 5
means strongly agree. As we can see the mean value being 4 or greater than 4 meaning
respondent agrees on research question. Respondant agrees that implication of kaizen
costing system in new product development can reduce the product cost.
Use of Kaizen costing system would help managers for lowering the future material
procurement costs. It provides manaers with strategies to lower actual production cost.
Future labour cost can be considered as cost reduction area during process production.
For cost reduction related to future selling and distribution, respondent mean marking 4.3
meaning kaizen costing system also help to reduce cost related to future selling and
distribution in new product development.
During design and manufacturing process of new product development, kaizen system
will help for product improvement. In figure 2 we can see that kaizen system provides
production department of the comapany with strategies for product enhancement and

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improvement according to costumer requirement and expectation. Organisational based
kaizen costing system will help to improve the revenue of the company as the cost of the
new product developed is reduced. The finding shows that kaizen costing system actually
helps to reduce cost of product in new product development menthod.

Figure 2: Statistical calculation based on five point Likert scale.

b. Product cost management (cost reduction) by target costing system

Figure 3: Factor analysis

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Figure 3 shows the success index corresponding to the success factors. New product
success rate, sales percentage, market share success index value is almost near to 1
meaning target costing method is relevant for NPD success. In Figure 4 the value of
Pearsons coefficient is equal to 0.302. The value is quite significant value meaning target
costing is valuable tool for new product enhancement when introduced in the market. The
significant correlation between target cost and success index meaning cost reduction and
product success.
In Figure 3 there are two components of the target cost (TC), one is component-level TC
and the other is product-level TC. Component-level TC is not related with the success or
cost reduction of the product as this is for the supplier who only focus on product
requirement from company. Product-level TC in figure 3 is approach for company
launching new products hence product-level TC only influence the success of NPD. The
value of functionality cost, attribute cost, trade-off functionality cost is lower for target cost
method and helps to reduce the overall product cost.
Target costing is very common among Japanese product development companies.
Application of TC in Malaysian automotive companies by Baharudin and Jusoh (2015)
shows some interesting findings. First finding shows that the degree of customer
orientation and requirement influences the design and implementation of target costing
process. In the Malaysian automotive company context, all the important parts like
chassis, engine and transmission parts are manufactured in the headquarters overseas.
Malaysian company cannot change based on costumer requirement and orientation thus
influencing the TC process for cost management.
The degree of information available also influence the design and implementation of
target costing system in context of Malaysian companies for cost management. For
operational decision and strategies financial accounting information is not suitable. In
case of Malaysian companies they still rely on the financial accounting information. Thus
lack of cost management related information, influence on designing and implication of
target costing can be seen in Malaysian companies.
The relationship between supplier and product development companies also influences
the design and implication of TC. Company applying TC reaches full integration stage if
they have close supplier relationship. Japanese companies have close relationship with
their suppliers. It helps Japanese product development companies to transmit down
competitive pressure and cost reduction. But the case is opposite with Malaysian context,
conforming that loose supplier relationship have influenced the design and
implementation of target costing process in Malaysian organization.

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 5. Discussion

Kaizen costing is cost reduction method for new product development throughout the
manufacturing process with effort from all departments. As finding shows in
manufacturing plant all the department of the company acts and phase of production are
equally important for cost reduction.
Implementing kaizen costing at product introductory phase, material procurement phase,
labor acquisition, selling and distribution phases can help for cost reduction. It aims at
permanent decrease in the cost of products being manufactured. Analysis by Rahmanian
and Rahmatinejad (2014) and Sani and Allahverdizadeh (2012) also shows kaizen
costing method is useful for cost reduction and is different from traditional approach of
cost management. The result related to cost reduction is similar i.e. kaizen cost control
method helps to reduce the total cost of the product in NPD and moreover the finding
have highlighted the department and phase of production where cost control is active.
Kaizen costing system helps to complement the existing techniques and strengthen
present day market cost reduction possibilities. There is urgent need for companies to
adopt and implement culture and technique, this helps to ensure activities of departments
and NPD success.
Target costing system is another cost management technique used in new product
development. Product success rate, sales percentage, market share success value
shows inclination for market success meaning NPD success. Result gained by Kocakulah
and Austill(2006)for home meal replacement industry using target costing method shows
reduced cost and profitability gained. The analysis provide base for subsequent
operational phases, profitability is gained throughout the product life cycle and direct
design and planning activities are monitored from beginning.
Comparing with by Kocakulah and Austill (2006) result show similarity in our data result.
Our analysis also ensures that target costing ensures product success and profitability
can be gained. Customer satisfaction degree also inured through insurance of profitability
in each stage of the product development.
Target costing method is a culture in Japanese manufacturing company. The same
culture and system can be implemented in other industries around the world. Result
shows that target costing might not be as effective as expected and the reason behind
should be no authority or power to change design according to costumer requirement,
lack of cost management information and loose relationship with supplier.
Malaysian automotive company as case study showed that Target costing approach
didnt work well as theoretically expected. As target cost analysis begins right from the
designing phase of the product development. In Malaysian automotive company the main
parts like chassis, engine and transmission parts are designed and manufacture at
headquarters of parent company (Japan, USA and Europe) so the company loses to

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implement cost reduction strategy at designing phase which influence the cost reduction
result.
Comparison to survey of the adoption of target costing in Dutch firms by Henri and Peter
(2003) shows that target costing adoption have helped firms to reduce cost and reduce
environmental uncertainty. Unlikely Malaysian company, Dutch firms product design
department have power to design and manipulate at the designing phase of the product
which significantly influence the cost reduction process.

6. Conclusion

Globalization has posed need of new product development as must for survival in the
market. Successful launch of the product can help to capture new market, lead market,
improve share values, and revenue. Cost management techniques for cost reduction
should be implemented for product success.
Organizations are encouraged to adopt Kaizen costing and target costing in order to
strengthen cost reduction possibilities in present market. Kaizen costing system should
be included along with Kaizen culture. Kaizen culture helps to entail synergy between
various departments of the organization. Target costing will help organization by providing
analytical techniques to indicate where cost reduction is most effective in project life cycle.
Kaizen and target costing might not work as expected theoretically. It also depends on
the nature of organization. For manufacturing firms which goes through own designing
phase will be benefitted since most of cost related issues are in designing phase. In
summary cost management is big issue in product development and applying Kaizen and
target costing strategy helps for cost reduction or management during product
development cycle.

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References

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Appendix

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